Why Agencies Can't Create Products

No self-respecting “future of the agency” panel or article is complete without a detour to product world. This is a mythical place where agencies have thrown off the bounds of time sheets, unreasonable clients, service company margins and narrow briefs to allow their creativity to take over and lead to new product innovations that will bring forth untold riches. It is also a myth.

Agencies on their surface have all the ingredients to become part product outfits. They have creative and engineering talent in-house, business acumen honed in their work for clients and, above all else, a keen appreciation of how consumers think and behave.

In reality, it’s not quite that simple — and it probably never will be. Despite the few shiny success stories, agencies, for better or worse, appear consigned to the services business, and any product forays will remain firmly on the sidelines, used more for PR and recruitment than anything else.

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The crux of the problem is business models. Agencies’ priorities will always lie in maximizing billable hours and hunting for new clients. The more hours they bill, the more money they make, and that model is at odds with the approach of startups and product-development shops. Agency staffers might dedicate 10 or 20 percent of their time to a project, but their focus will always remain on serving clients. As a result, the products they create often end up feeling like side-projects or novelties, rather than legitimate business opportunities.

“With the structure they have, I don’t think it’s possible for agencies to create real products,” said Hashem Bajwa, CEO of product development studio Design & Development, which was spun out of ad agency Droga5. “They’re not dedicated enough to it. Clients and new business will always be the priority for an agency, so product development ends up becoming this dream on the side.”

Even agencies themselves agree with that analysis. The fact that they exist primarily to service clients makes it basically impossible for them to spend the time and effort necessary to develop real products. “For agencies to think they can just devote people’s spare time and build products is misguided,” said Tim Nolan, Creative Director of BBH Labs. “To build a successful product, you need to know what your target is and build and structure the business around that. It’s already pretty hard for Foursquare to be Foursquare and for Twitter to be Twitter, and that’s all those guys are focused on.”

BBH is one of many agencies that house their innovation and product-development efforts under a separate banner within their organizations. Huge and Rockfish have “labs” divisions, for example, while Wieden & Kennedy calls its own efforts in the space “Incubator.”

Few, however, have a dedicated staff. Most run on the spare time of handful of agency staffers who turn their attentions to that area of the business amid all of the client work. This isn’t exactly like startups, where founders use every waking hour sweating over the smallest details of their babies. For many agencies, these units are little more than research and development initiatives or glorified marketing efforts designed to help them demonstrate their capabilities of innovation to current or prospective clients. “At a base level, that’s probably what most of them are,” said Nolan.

There have long been high hopes for agencies to reinvent their models by owning their own intellectual property. Agencies like Anomaly have long trumped this fact and remain dedicated to the notion that they can have it both ways, serving clients and themselves. Anomaly has what appears to be a mixed record at creating its own products. T-shirt company Idenitee never took off. It has seen more success with building the brand of chef Eric Ripert.

But for some agencies, mixing their core services business with their product offshoots is a recipe for disaster. Instead, shops are breaking out separate companies to house their product-development efforts rather than keeping them within the agency framework. Though Rockfish calls its product division the “Rockfish Labs,” for example, each of its products is essentially run as a subsidiary company with its own profit and loss accounts, and has dedicated staff running and managing them. Though each company taps Rockfish’s pool of developers, engineers and creatives, their time is billed to each respective company in order to keep track of how each one is performing from a business perspective.

“You can’t sort of do anything and be successful,” said Rockfish CEO Kenny Tomlin. “It’s one thing experimenting here and there, and you might get lucky, but if you’re going to build a successful product, you’ve got to have dedicated people on both the tech and business development side.”

Some of Rockfish’s products to date have included CouponFactory and TidyTweet, both of which function as standalone business and generate revenues independent of the agency, Tomlin said.

Bajwa’s Design & Development is taking a similar approach. The firm was born out of agency Droga5, but operates as a separate entity. For the reasons he explained above, Bajwa reiterated that in his view, it’s essential the product-development shop operates completely independently and with its own dedicated staff. It’s not an agency lab or an innovation arm, it’s a standalone company with the sole intention of creating financially viable products, Bajwa said.

Examples of its efforts so far include Thunderclap, a tool to help raise awareness about specific issues by allowing thousands of users to send messages out across their social networks simultaneously.

“Agencies like Anomaly or BBH or W+K say they’re doing a lab or an incubator and it sounds cool, but I never see any results from it and the stories end up being hollow. This is not an agency hobby, it’s a real commitment with the goal of creating valuable businesses,” Bajwa said.

The company is still figuring out exactly how best to take advantage of its ties with Droga, but will likely use it to help with the marketing, branding and distribution of its products once they’re built.